Global sell-off continues, ECB in focus

Uncertainty played a role in the stock markets yesterday, as European indices mostly finished lower, even though they enjoyed gains throughout the session.

The FTSE 100 managed to post a small upward move, but it was the exception of the major markets. US markets finished in the red, tech stocks took the brunt of the sell-off. The Dow Jones and the S&P 500 have now lost all the gains that were racked up during the year.

Amid the broad-based decline, there were some positive corporate stories. Tesla shares jumped in after-hours trading after the firm posted third-quarter earnings per share (EPS) of $2.90, which smashed the 19 cents loss per share that analysts were expecting. Microsoft and Ford both posted better-than-expected EPS too.

Recently, European equity markets have been finding it difficult to hang on to any gains, and that suggests investment sentiment is still weak. Whenever there is a major sell-off, traders are always nervous about getting back into the market, and it appears that some dealers fear this wider negative move isn’t over. In light of the move in New York last night, it is no surprise that Asian markets suffered heavy losses, and dealers in Europe are likely to stay risk adverse.

President Trump took a swipe at Jerome Powell, the head of the Federal Reserve, for hiking interest rates. Mr Trump claims the central banker could damage the economy. President Trump wants a soft dollar to help US trade, and likes loose monetary policy so it can prop up the stock market. The US central bank is independent of the White House, and Mr Powell is unlikely to give in to criticism.

Broadly speaking, the US economy is motoring along. The latest services and manufacturing PMI reports topped economists’ expectations, but the new homes sales report showed a 5.5% drop. The US housing market has been soft recently, partially because the market enjoyed impressive growth for several years, and partially because of the higher interest rate environment. That being said, the Federal Reserve are still likely to continue on their path of hiking interest rates.

Oil rebounded yesterday and the positive move was helped by the oil and gas inventory report from the Energy Information Administration. Oil stockpiles grew by 6.34 million barrels, while gasoline stockpiles dropped by 4.82 million barrels, and the consensus estimate was for a drop of 1.75 million barrels. The larger than expected drop in gasoline inventories counteracted the build in oil stockpiles. The energy market has been under pressure recently, and short covering would have helped push the price up.

Theresa May emerged unscathed from the meeting with the 1922 committee, and that should halt the chatter about a leadership challenge. There still is a lot of uncertainty surrounding Brexit, but at least some of the pressure has been taken off the Prime Minister.

The European Central Bank (ECB) will announce their interest rate decision at 12:45pm (UK time), and the press conference will follow at 1.30pm (UK time). No change to the interest rate is expected. The ECB are likely to stick to their goal of winding down their bond-buying scheme by the end of this year. The underwhelming manufacturing and services PMI reports that were revealed by the currency bloc yesterday point to a slowdown in economic activity. When you take into account the political clash between Rome and Brussels, it is hard to foresee any hawkish language from the ECB in the medium-term.

At 1.30pm (UK time), the US will release the latest durable goods report and the consensus estimate is for a decline of 1%, which would be a major drop from the 4.5% rise that was registered in August. The update will give us a good indication of demand in the US economy. Consumer confidence is running high, but actual goods sales will give us a better picture. The jobless claims report will be announced at the same time, and traders are expecting 214,000.

EUR/USD – has been diving lower since late September and if it holds below the 1.1510/00 region, it could pave the way for the 1.1300 area to be retested. A move to the upside could run into resistance at 1.1618 – the 100-day moving average.

GBP/USD – the push higher since mid-August is starting to look weak, and if it remains below 1.3000, it could put 1.2785 on the radar. A rally above 1.3000, could bring the 1 3300 region into play.

EUR/GBP – has been in a downward trend since mid-August, and if the bearish move continues it could retest 0.8725. A break above 0.8880 – 100-day moving average, could bring 0.9000 into play.

USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 114.73. Support might be found at 111.50 – 100-day moving average.

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